April 30, 2010

A Financial Reform Confession

You may have noticed my commentary on financial regulatory reform has been somewhat hamstrung by my skeletal understanding of the substance of the issue. Other policy commentators have learned more about this issue than I have, but even their opinions are heavily sprinkled with self-doubt. This points to the fact that liberals and the wonk community have a lot less confidence that financial regulatory reform will work than we did that, say, health care reform would work.

One reason for the difference is that health care was a highly mature issue. Liberals had spent years and years thinking extensively about the problems of health care reform, and when the political opportunity arrived, we were ready to go. Very few people were pondering financial regulatory reform when the system collapsed in 2008. Hard-core wonks are still scrambling to figure out some basic questions -- is the size of the banks the fundamental issue? Their leverage? Political influence? Etc.

A second difference is that health care offers plenty of successful models -- literally every other advanced country in the world has a universal health care system that, by objective standards, works more efficiently than the American system. But it's hard to find examples of countries that have successfully managed the complexity and systemic risk of the modern financial system.

The result of this is that we have some regulatory proposals that we think will help, but almost nobody thinks will fully insulate us from the risk of another shock, and could possibly prove useless. The confidence level is fairly low. Now, I still think these proposals are far better than nothing. They're also the best chance we have to get the answer right. We could wait a few years until the debate has matured, but the truth is that only is the shadow of an economic crisis and a backlash over the bailouts does the political space exist to impose a reform that actually takes a bite out of Wall Street.

So at this point, the best bet is to pass the toughest, most anti-Wall Street reform possible while the window of opportunity remains open. Then, if it proves too tough, or if somebody comes up with a better way to regulate the system, you can bargain away the too-tough parts of the law for something better.